credit cards

Is a store credit card a good deal?

Credit Cards » Is A Store Credit Card A Good Deal?

Low credit limits. "The credit limits are usually pretty low," says Emily Peters, credit expert for Credit.com. "I would think on average on a retail credit card, maybe a thousand bucks."

With a credit limit that low, it's easy to run up a high balance and hurt your credit score. A lower credit score may even trigger other card issuers to increase your interest rate or reduce your credit limit.

Co-branded cards may offer more generous credit limits, depending on the applicant's credit history.

Try to keep statement balances on all your cards under 30 percent of the credit limit. If your store card has a $500 credit limit, try to keep statement balances under $150.

Lowers your credit score. An application for a new credit card triggers a hard inquiry on your credit report, which can impact your credit score. The damage typically costs 10 to 30 points, according to Andy Jolls, CEO of the credit educational site VideoCreditScore.com and formerly an executive at myFICO.com.

People who sign up for multiple cards can see a bigger drop. "You're going to see more than a 30 point ding if you start getting multiple cards," says Jolls. People with a lot of store cards tend to be riskier borrowers, he says, and the FICO scoring model takes those inquiries into account.

An inquiry will stay on your credit report even if you never activate the card, he says. Inquiries can remain on your credit reports for two years, though the FICO scoring model only looks at those from the last 12 months.

Closing recently opened store accounts won't make them disappear. "That account will stay on your credit report for seven years. It doesn't instantly go away when you close it," says Peters.

Applying for a new card also lowers the average age of your accounts, which affects the length of your credit history -- a factor that makes up 15 percent of your FICO score. To see what a new application would do your scores, use our free FICO score estimator.

The reduction in credit score can come back to haunt people who apply for loans the following year. People with borderline-excellent FICO scores of 750 or 760 might get bumped down to the next best rate -- all because that store card application cost them points they couldn't afford to lose.

Jolls puts it into perspective for those with mortgage loan applications in their near future. "You got to be careful to not trade $50 in savings now for $50 more in a mortgage payment per month for the next 30 years."

Another spending temptation. Consider your habits. If coupons for items you want send you rushing to the store, store cards might get you into a lot of debt.

"Once you sign up for a store card, you give the store free reign to bombard you with enticing ads and shopping promotions," says Mehdikarimi.

Undisciplined spenders need not apply.

Should you apply?

It depends. If you plan on getting a loan in the next year, you might want to avoid taking on any new credit cards. If you pay your balances every month and could take advantage of the promotions without overspending, then you might benefit from a store card. You also want to take into account how the card stacks up against general-purpose credit cards. Bring a card application home or look online and compare the costs and benefits of each card.

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